Posts Tagged ‘Student loan debt bubble’

This chart from The Atlantic magazine’s web site shows how student debt has increased just since 1999. The red line is student debt, the blue line is all other individual and family debt. While American families overall have stopped taking on new debt and are even paying down existing debt a little, student debt loan continues to mount.

The New York Federal Reserve Bank estimated American student debt was $90 billion at the start of 1999 and $550 billion by the second quarter of this year, according to Sarah Jaffe on AlterNet; the U.S. Department of Education estimates student debt at $805 billion, and says it will soon reach $1 trillion.

One cause is the high unemployment rate among recent college graduates, which means they let their debts compound instead of paying them off; another is the increase in tuition at public colleges and universities.

President Obama rightly stated in his State of the Union address last year that “nobody should have to go broke because they choose to go to college.” If a college graduate doesn’t get off on the right foot, he or she can be in the equivalent of indentured servitude for the rest of their life.

But the student loan debt bubble affects more people than just the debtors. If you have loan repayments of $400 to $1,000 a month, that’s money you don’t spend or invest in the larger economy. And eventually, unless something changes, the student debt bubble is going to burst, with consequences as catastrophic to the larger economy as the bursting of the home mortgage bubble.

Student loans are different from other kinds of debt. You can’t discharge the debt by going through bankruptcy. The result is that unless you graduate from college and immediately get a job that pays big money, there is a good chance you will spend the rest of your life with a large, compounding debt from which you never can get out from under.

The average college student graduates with a debt of about $27,000, but that can easily mount to $100,000 or more through compound interest, fees and penalties. Lenders can garnish wages, intercept tax refunds and, when the time comes, dock Social Security payments.

In his address last year, President Obama proposed student loan forgiveness after 20 years or, for those who commit to public service, after 10 years. He also proposed a $10,000 tax credit for families who send sons or daughters to four-year colleges. But his recent agreement with House Speaker John Boehner on the debt ceiling will actually make things worse for college students. Under that agreement, interest would start accumulating on student loans while students are still in graduate or professional school. By one estimate, this means they’ll leave school with 16 percent more debt on average.

One thing Congress could do to help would be to allow student loan debtors the benefit of federal bankruptcy law after a certain period—say 10 years. But there is little chance of that. In fact, the bipartisan congressional deficit reduction committee is likely to make things even harder on student loan debtors.

When I went to college in the 1950s, state colleges offered college educations to anybody capable of doing college work at tuition rates anybody could pay. Middle class families could save up to put their children through college without going into debt, and poorer students could work their way through college without going into debt.

I would like to see the state college systems resume their original mission, and get rid of all the chancellors who want to turn colleges into profit centers for their own aggrandizement. But seeing as how financially strapped the state governments are, there is little chance of this, either.

[Added 9/28/11] I was hasty in asserting that other consumer debt is being paid down.

The FDIC in its quarterly report for the 2nd quarter shows that loan portfolios increased by $34.3 billion to commercial and industrial borrowers, auto loans increased by $9.7 billion, and credit card debt increased by $5.2 billion.

… The debt deleveraging story line … did not wish to take into account that consumers were defaulting and banks were writing off debts more than consumers were paying them down.